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CapitalPanda | Amid inflation threat across the CEE region, Croatia seeks a safe haven by adopting Euro

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Read current news from the financial markets and expert articles from our analyst.

Amid inflation threat across the CEE region, Croatia seeks a safe haven by adopting Euro

Croatia sets its path to adopting Euro as its currency in a “last minute” time when volatility and instability are growing in the world, especially across the Central and Eastern Europe.

While the Czech crown (CZK), for example, is moving up and down in percentage terms on a daily basis, the Croatian kuna (HRK) is much more stable, currently only 0.5 % above the level that was set as the central rate (1 euro = 7.53450 kuna) in 2020, when Croatia joined ERM II.

The Czech National Bank is strongly intervening against the weakening of CZK, which is causing volatility. The actions of the Croatian National Bank, on the other hand, are aiming at the stability of the kuna exchange rate against the euro, which is the nominal anchor of its monetary policy.

Comparison of CZK/EUR and HRK/EUR development since the beginning of the war

CP graf.42

Source:  https://www.xe.com/currencycharts/?from=EUR&to=HRK&view=1M https://www.xe.com/currencycharts/?from=EUR&to=CZK&view=1M

Euro to be approved by Croatia in April 

The final text of the Euro Law should be sent to the Croatian Parliament for a second reading in April, according to the government of the Republic of Croatia. If the EU Council votes on Croatia's eurozone membership in July and adopts a fixed exchange rate. In addition, there are 78 more legislative initiatives that will be altered completely or largely as a result of the euro.

At its session on March 14, the Croatian Financial Services Supervisory Agency (HANFA) also discussed the course of current legislative preparations for the introduction of the euro as the official currency in the Republic of Croatia, as well as the impact of the introduction of the euro on the solvency position of insurance companies.

What will happen to loans after joining the eurozone? 

The principle of loans in euros will stay unaltered, while loans in HRK, as well as loans with a currency clause in euros, will be converted into euros at the medium exchange rate, i.e., EUR/HRK 7.53450. [3]

When it comes to interest, the amount is determined by the rate of interest. There are at least two sub-questions to address here: whether the interest rate is constant or variable, and what the agreed reference interest rate is. If the debtor's interest is computed using a fixed interest rate, then the amount of interest should not vary significantly. When a variable interest rate is used to compute a loan, the amount of interest charged will fluctuate based on the movement of reference interest rates or the variable element of the variable interest rate in financial contracts. 

Other nations' experiences suggest that entering the euro area lowers interest rates since the country's credit rating improves, resulting in lower credit and currency risk premiums.[4] However, it should be noted that the specified interest rate drop does not always occur as a result of joining the euro area but might be achieved gradually through the following experiences. For example, whereas interest rates in Latvia, Lithuania, and Slovakia fell almost immediately after joining the eurozone when measured by government bond interest rates, this was not the case in Slovenia until two years later.

Looking at the longer term, all these nations had considerable interest rate reductions, therefore the long-term interest rate was mentioned in Slovenia, but otherwise the rate used for convergence evaluation decreased from 4.53 percent in 2007 to 1.71 percent at the end of 2015. Today, for example, all these countries have interest rates of 0.16 percent or less, but Croatia has a rate of 0.45 percent.

In general, joining the euro area is expected to lower interest rates and thus lower loan annuities, but it should be remembered that variable interest rates are primarily determined by ECB decisions, and it is possible that the ECB, in the face of rising inflation rates, will begin by raising reference interest rates, which will lead to an increase in annuities over time. [5]

Overview report prepared by Jozo Perić, Head of Portfolio Management Department and Investment Research Department

[1,2,3,4,5] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.

 

*Past performance is no guarantee of future results.

 

 

The content of this material constitutes marketing communication and should not be considered as any type of investment advice and/or investment research and/or a solicitation for any transactions. This material was prepared for informational/educational purposes only and does not imply an obligation to perform investment transactions nor does it guarantee or predict future performance. BCM Begin Capital Markets Cy Ltd and its relevant persons including affiliates, agents, directors, or employees do not guarantee the accuracy, validity, timeliness, or completeness of any information/data provided by third parties and assume no liability for any loss arising from any investment made based on the said information/data. Past performance is no guarantee of future results.